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Welfare Analysis Meets Causal Inference

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  • Amy Finkelstein
  • Nathaniel Hendren

Abstract

We describe a framework for empirical welfare analysis that uses the causal estimates of a policy's impact on net government spending. This framework provides guidance for which causal effects are (and are not) needed for empirical welfare analysis of public policies. The key ingredient is the construction of each policy's marginal value of public funds (MVPF). The MVPF is the ratio of beneficiaries' willingness to pay for the policy to the net cost to the government. We discuss how the MVPF relates to "traditional" welfare analysis tools such as the marginal excess burden and marginal cost of public funds. We show how the MVPF can be used in practice by applying it to several canonical empirical applications from public finance, labor, development, trade, and industrial organization.

Suggested Citation

  • Amy Finkelstein & Nathaniel Hendren, 2020. "Welfare Analysis Meets Causal Inference," Journal of Economic Perspectives, American Economic Association, vol. 34(4), pages 146-167, Fall.
    • Handle: RePEc:aea:jecper:v:34:y:2020:i:4:p:146-67
    DOI: 10.1257/jep.34.4.146
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    More about this item

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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